It's better to have a kitty for emergencies

Life hasn’t been easy for employees at most companies this year. With the grim global environment, many companies have already frozen salaries. Worse still, some, especially global banks, which have been mired in controversies, have even handed out pink slips. And, one does not know who or which sector will cut workforce in the future, if global economies continue to remain in the doldrums.

The first thing that comes to the mind of a laid-off employee is – how to service the home or auto or personal loan? The answer lies in either an emergency fund that should have been created during the employment days or an insurance cover that will pay the bills.

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Some insurance companies have already launched products, but mostly as riders. ICICI Lombard, HDFC Ergo, Bajaj Allianz General Insurance and Future Generali General Insurance provide this facility as a rider. For instance, ICICI Lombard’s Secure Mind is essentially a home loan cover which gives additional benefit of job loss. HDFC Ergo has a similar product which also gives home insurance. Bajaj Allianz covers job loss additional on home and auto loan insurance. Future Generali offers it additionally on personal accident cover.

Bharti AXA is going to be the latest entrant in this market soon. The product, as CEO Amarnath Ananthanarayanan, says, will be an add-on with a credit shield plan. The product, at present, is awaiting the regulator’s (Insurance Regulatory and Development Authority) approval.

But, before you get excited about these schemes, remember that the unemployment benefit is only for a limited period. You can claim for the job loss feature only to pay three months of your equated monthly instalments for home or auto loan. Reason: It is assumed that one will get a job in three months time.

There are restrictions, too. For instance, there is a waiting period of 30-90 days before you can claim for a job loss. Your claim will not be honoured if you lose your job before the commencement of the policy or if it is impending at commencement of the policy. Your claim can be refused if you lose your job on the grounds of a pre-existing disease or if you refused an alternate employment by your employer after it sacked you.

The biggest problem in this cover is proving that you lost your job as part of the company shutting down business or downsizing workforce in a tough business environment or for health reasons, and not because of poor performance.

The sum assured is determined based on the outstanding loan amount. Say, a 35-year old has an outstanding loan of Rs 50 lakh, the sum assured will be Rs 50 lakh. The premium will be Rs 15,000 per year with ICICI Lombard and Rs 58,000-65,000 with HDFC Ergo’s single premium policy for five years.

These policies can be taken for anywhere between one and five years. But, you can claim only once during the policy term. “While you can claim for job loss every year in an annual renewal policy, you can claim only once in a five-year or three-year or two-year policy," says Amit Bhandari, VP - health underwriting & product, ICICI Lombard.

If you are sacked when above the age of 50, you cannot claim for loss of job as these policies cover those in the age group of 20-50 only.

Ananthanarayanan says, “This product is meant for addressing short-term needs only like the biggest priority for most will be repaying their loans. This also ensures you don’t dip into your savings during this period."

Importantly, most of these products are options for you only if you have a loan to cover. Even for job loss covers linked to personal accident plans, experts say, do not buy the product for the rider. You could put the money to better use in some other product for a much higher yield. Under such circumstances, it’s better to have an emergency kitty.

According to certified financial planner Suresh Sadagopan, this could be a solution for someone who has not been able to save a huge amount. “Otherwise, always keep a contingency kitty ready for a rainy day. It comes in handy at such times."